How Lean Six Sigma is used as a strategic business tool to increase shareholder value

1. LEAN SIX SIGMA FOR INVESTORS How Lean Six Sigma is used as a strategic business tool to increase shareholder value

2. PROBLEM Every company is in competition for • Customers (for revenue growth) • Shareholders (to drive share price) QUESTION How does one reveal the potential for economic profit, revenue growth and hence value creation from different components of your business in a unified, methodical and consistent way?

3. THE VALUE MOUNTAIN • Revenue Growth (X-axis) • Market to Book Value (Y-axis) - the stock market premium that will be paid for net assets (book value) • Economic Profit (Z-axis) - the difference between return on invested capital (ROIC %) and the cost of capital (COC%) High ROIC = high 8 7 6 Competitor C 5 Competitor B 4 Market to Book Value 3 YOU ? 2 (2)-2% 2-6% 6-10% >10% 1 Competitor A Low ROIC = low EP% = ROIC - COC 0 0-3% 3-9% 9-13% 13-25% Revenue Growth Based on data 1994 to 1998, Tom Copeland’s Valuation ex. 5.2, 2000 Edition

4. Profit After Tax Invested Capital THE VALUE MOUNTAIN cont’d • ROIC = High ROIC = high 8 7 6 • Invested capital is the total assets of the organization minus the current liabilities Competitor C 5 Competitor B 4 Market to Book Value 3 YOU ? 2 (2)-2% 2-6% 6-10% >10% 1 Competitor A Low ROIC = low EP% = ROIC - COC 0 0-3% 3-9% 9-13% 13-25% Revenue Growth Based on data 1994 to 1998, Tom Copeland’s Valuation ex. 5.2, 2000 Edition

5. MAKING ROIC THE PRIORITY • ROIC is probably the strongest driver of high multiples of book value • Revenue growth is also a strong driver of higher market value • As ROIC% increases, the trading multiple typically increases • However if Economic Profit (EP%) = 0, then the ROIC% = Cost of Capital • i.e. Company likely to trade at around book value

6. Growth plans are often affected by uncontrollable external market forces Rising energy costs Increasing interest rates Changing fashions (tastes) Unpredictable politics Global economic instability And Growth without Economic Profit creates no long lasting value (e.g. many dot coms) WHAT ABOUT REVENUE GROWTH? PROBLEM

7. THE CONNECTION • Internal inefficiencies are easier to identify, measure and control • ROIC therefore is a HUGE value lever that’s easier to reach up to • However, performance improvement results MUST be tracked to the bottom line in support of strategic objectives

8. EXECUTING CORPORATE STRATEGY • Identify the platforms for shareholder value creation at both corporate and business unit levels • Identify value streams within the business units that suggest the greatest potential for improving shareholder value • Identify and prioritize projects that will maximize value THE LEAN SIX SIGMA APPROACH

9. CORPORATE ANALYSIS • Comparing value with other companies will often indicate where the corporate opportunities are

10. BUSINESS UNIT ANALYSIS – part 1 Economic Profit as a % of Invested Capital (spread) EP% shows where Value is being created • A comparison of each business unit will show where Value is being created or destroyed A 10% Creating Value B 5% C 0% Invested Capital 10 20 30 40 50 -5% Destroying Value D -10% Net Assets E “…some companies get a conglomerate discount, but there are others like GE who got a conglomerate premium. And guess what? It all depends on performance, and if we could get our performance up, we felt we’d be able to earn those types of premiums..…that’s how we started Value Based Six Sigma.” - Lou Giuliano (CEO, ITT Industries), May 2000

11. BUSINESS UNIT ANALYSIS – part 2 Economically Profitable Profitable A • Measurement of both business unit profitability and competitiveness shows relative position • The larger the circle, the greater the revenue C MARKET PROFITABILITY B EVA Breakeven E D Unprofitable Disadvantaged Parity Advantaged COMPETITIVE POSITION

12. Identify specific projects within a targeted value stream Prioritize projects based on the likely benefit Expose Lean Six Sigma opportunities through quality and time based complexities BUSINESS UNIT ANALYSIS – part 3

13. WHY LEAN SIX SIGMA? • Lean Six Sigma incorporates the principle of Lean’s simplified flow and speed to increase business process velocity • Lean Six Sigma incorporates Six Sigma’s approach to eliminating errors, variation and instability • The combination of Lean & Six Sigma attacks the “hidden factory” of complexity in your business

14. MOVING THE VALUE LEVER Methodology Improvement Benefit Location Fewer assets Reduced waste LEAN Balance Sheet Lower inventories Reduced DSO SIX SIGMA Reduced variance Lower material costs Income Statement Lower cost of labor Lower R&D costs

15. Income Statement ECONOMIC PROFIT Price Revenue Fewer Assets + Reduced Costs = Increased EP Volume Labor Balance Sheet Cost of Goods Sold Material Cash Fixed Cost Operating Profit Receivables Labor - Net Op Profit After Tax R&D Inventory Total Assets Non Labor - Fixed Assets - Income Tax Sales & Manufacturing SG & A Other Assets Cash Invested Capital Capital Charge SG & A Payables - = Economic profit is the income generated relative to all resources required including capital costs from the balance sheet Current Debt Current Liabilities Economic Profit Other Current Liabilities

16. WHAT IS LEAN SIX SIGMA? Lean Six Sigma is the combination of two powerful operations improvement management philosophies that came out of the manufacturing sector in the 1980’s. In recent years it has been developed and successfully deployed in the service sector to include banking, retail, healthcare, staffing and financial services. WHAT DOES LEAN MEAN? • Lean is the elimination of all forms of non value added work from the customers perspective (waste) in business transactions and processes WHAT DOES SIX SIGMA MEAN? • Six Sigma is a statistical based methodology used to eliminate defects (errors or variations) in business transactions and processes

17. WHAT IS WASTE? Any activity which absorbs resources BUT adds no value to the service or product from the customer’s perspective • Non value-added workis called waste • Wasteis caused by inefficiencies • Inefficiencies incur costs CUSTOMERS ARE UNWILLING TO PAY FOR WASTE

18. WHAT ARE DEFECTS? • Defectsarevariations in transactions & processesthat reduce the quality of products & services • Defectsrequire rework, consume resources, create instability, generate delays & cause scrap • Defects are frequently & mistakenly accepted as an unavoidable part of doing business CUSTOMERS ARE UNWILLING TO PAY FOR DEFECTS

19. THE COST OF WASTE & DEFECTS • Delays in transactions & processes • Lower quality products & services • Consumption of scarce resources • Customer dissatisfaction WASTE & DEFECTS REDUCE EBITDA

20. REWARDS FOR IMPROVEMENT • Reduced costs • Increased margins • Lower inventories • Reduced DSO • Better cash flow • Less debt INCREASED EBITDA

21. REWARDS FOR IMPROVEMENT cont’d • Faster transactions & processes • Higher quality products & services • Satisfied customers COMPETITIVE ADVANTAGE

22. ABOUT US Six Sigma Solutions LLC is owned & managed by certified Lean Six Sigma experts. We design, develop & execute operations improvement plans using Lean Six Sigma tools & methodologies to minimize waste (non value-added work) & defects (variations) in business transactions & processes. Our clients benefit from: • Reduced costs • Better quality products & services • Satisfied customers

23. PARTNERS Carl E. Watson Jr. BSc, Master Lean, Six Sigma Master Black Belt Cell: 256-337-9811 cwatson@sixsigmasolutionsllc.com OFFICE PO Box 3375 Huntsville AL 35810 info@sixsigmasolutionsllc.com http://www.sixsigmasolutionsllc.com CONTACT US